Review Netspar Anniversary Meeting: Retirement and the Journey from Product to Person
Social changes in terms of life expectancy, the labor market, technology, and greater individual responsibility for financial and other decisions are forcing the pension industry to transition from focusing on products to focusing on individuals. Meanwhile, meeting individual needs can also produce considerable economic gains, as Casper van Ewijk argued in his introduction to the 14th Netspar Anniversary Meeting. After all, a euro given up now is worth more than a euro too much later. On the journey from product to person, we confront a host of issues, including freedom of choice, technology, and the latest insights into risk appetite, time preferences, and shortsightedness.
Approximately 25% of Dutch people are saving much for retirement, with an equally large group saving too little. On top of ensuring adequate income for everyone is the issue of how to allocate those euros at the right time for people to spend. Minister Koolmees of Social Affairs and Employment listed a number of yet-to-be-developed options in his so-called 10-item letter: life cycle investing, flexibility in pension benefits to allow a lump sum payout or trade-off against home equity, and an expansion of the pension system to include, for example, auto enrollment for independent contractors. These developments are all important elements of the new Netspar research agenda, “Netspar NexT.”
People are going to have more choices, and the Dutch Authority for the Financial Markets (AFM) finds that a good, logical development, as Jos Heuvelman stated in his lecture. As it stands, there is a fundamental mismatch between an uncertain world and the absolute certainty pension providers want to offer. The pension system is in critical need of change: hard-and-fast promises are no longer realistic. We are on the verge of one of the greatest social transitions ever – involving some 1.3 trillion euros. It must therefore, of course, be done with utmost care. For many people, their pension savings are their greatest asset, one imbued with tremendous emotional value: “I worked hard my entire life for this.”
An initial evaluation of the Improved Defined Contribution Scheme Act reveals a couple of problems. One of these is the relatively high temptation to take a higher payout in the first year. This introduces the potential for great volatility among people who cannot afford it financially. Important guarantees for options, then, include having appropriate products aimed at people who can and want to bear the attendant risks; fairly presented choices, without misguided direction from the system; and clear, balanced information, in which advisers continue to play an important role. Digitalization can also be used to present people with the best options for them at the right time and in the right manner.
Freedom of choice appears to run counter to protecting citizens. Yet, Don Ginsel of Holland Fintech wonders about the extent to which you are responsible for preventing people from making mistakes. You could also take pains to limit any damage from such mistakes. Ginsel presented an overview of technological advancements, trends, legislation, and parties beneficial to the pension industry. He remarked upon the financial and pension industry’s tendency to want to solve everything “in house” and mentioned an alternative: as things become ever-more specialized, the contracting out of specific types of services to expert parties can deliver efficiency gains. Moreover, handy building blocks called APIs make it so all these separate elements meld seamlessly together without causing the client any “trouble.”
Personal finance tools help boost pension engagement. Asset management tools help reduce administrative costs. The field has many providers operating in it, and with the rise of big data, the market is ripe for providing customers with better service and more information. Major tech players, such as Amazon and Google, have expertly capitalized on the notion of relevance: offering the right thing at the right time and place using their knowledge of the consumer. Integrating your service into the client’s daily life is becoming ever-more important and demands constant adaptation.
An important catalyst for constant innovation – and a missing element in the pension industry – is “voting with your feet.” In other words, only when people are free to leave at will do you receive true feedback as an organization or industry.
Lowest Hanging Fruit
Once you have developed an innovative decision tool – perhaps a pension saving game – how do you introduce it to people? How do you make sure they get the best use out of it? Thomas Post and Pieter Verhallen (Maastricht University) have an idea for pushing things along. Participants were introduced to behavioral screening to increase relevance for your target group. The principle involves defining one concrete change in behavior and using that as a basis for optimizing the steps your client must take to attain that behavior. Behavioral forces such as social norms (peer pressure), the path of least resistance, and pre-commitment can create just the right nudge to stimulate the desired behavior.
Someone might consider themselves an archconservative and yet opt for an extremely risky investment portfolio without batting an eye, and vice versa, according to Rogier Potter van Loon (Aegon). It is therefore best to query people about their level of risk aversion by sticking to the numbers, with not the money, but the experience of happiness being the central issue. By subjecting people to a series of choices (what minimum and maximum amount are you happiest with), you get down to an accepted range, that is represented as the so-called Gamma. This shows that for the vast majority of people, a variable annuity is the option that suits them best, even when results are disappointing.
How do pension participants weigh the present against the future? In the subsession, Jorgo Goossens (TiU and APG) got participants thinking with a cookie. Give people the choice between one cookie now or two tomorrow and most will choose that one cookie now. If, however, the choice is between one cookie in 50 days or two in 51 days, then most people will choose the second option. This inconsistency is attributable to shortsightedness: people perceive the future differently that the present. This has implications for, among other things, their saving behavior. People can be roughly grouped into four quadrants, each a different combination of consistency and patience. A given degree of flexibility can be offered depending on the participants’ time preferences: a customized package of options.